VFINX vs VTSMX

[spentpenny]

I'm ready to start my first-ever non-retirement investment account and I'm wondering if any of you awesome MMMers out there can shed some light on where I should start. (I did a search for this topic and nothing came up, but please forgive me if this has been asked and answered elsewhere in this forum!)

I've seen both VFINX and VTSMX recommended on the MMM blog. Is there a reason one of them would be better than the other for a beginner like me?

I appreciate any help you might offer! Thanks!

[Tjat]

Their performances are highly correlated as VFINX is an S&P500 index and VTSMX is a total stock market (in reality, 75% or so of VFINX and some mid-small indexes as well). Both will be fine for you, but most folks here tend to be in VTSMX (or VTSAX, the admiral fund version aka lower expenses but a 10K minimum)

[spentpenny]

Thanks for your response, Tjat!

Can you help me understand why most folks are invested in VTSMX/VTSAX instead of VFINX? Is there an advantage to investing in one fund over the other?

[GGNoob]

Small-cap and mid-cap stocks tend to out perform large-cap sticks. Since VTSMX/VTSAX is about 20% small/mid-cap stocks, it's performance is slightly better over the long run compared to VFINX.

[spentpenny]

Thanks, MiT! I appreciate this detail!

If I recently invested my first $3K in VFINX, would it make sense to trade that for VTSMX, or should there be an interval before making that trade?

[Telecaster]

Thanks for your response, Tjat!

Can you help me understand why most folks are invested in VTSMX/VTSAX instead of VFINX? Is there an advantage to investing in one fund over the other?

The basic theory is that VFINX is large cap stocks by definition.  But over time small caps actually have better returns.    VTSMX/VTSAX captures the whole market so you in theory you have better diversification and somewhat better returns.   

[spentpenny]

Thanks, Telecaster!

[GGNoob]

Thanks, MiT! I appreciate this detail!

If I recently invested my first $3K in VFINX, would it make sense to trade that for VTSMX, or should there be an interval before making that trade?

If you sell now, Vanguard will give you a warning that you cannot repurchase VFINX for a certain time period due to short term trading rules.

If you want to make the switch, go ahead, no need to wait. If your VFINX is down right now, it would be a good time to tax loss harvest anyhow. Just make sure you exchange from one fund to the other so that you are not out of the market.

[MDM]

But over time small caps actually have better returns.

So one can make a case for something such as "Vanguard Small-Cap Index Fund Investor Shares (NAESX)" instead of either VFINX or VTSMX.  Before jumping fully on that bandwagon, however, see http://www.bogleheads.org/wiki/Callan_periodic_table_of_investment_returns and understand "there is no sure thing" regarding asset classes.

[Telecaster]

But over time small caps actually have better returns.

So one can make a case for something such as "Vanguard Small-Cap Index Fund Investor Shares (NAESX)" instead of either VFINX or VTSMX.  Before jumping fully on that bandwagon, however, see http://www.bogleheads.org/wiki/Callan_periodic_table_of_investment_returns and understand "there is no sure thing" regarding asset classes.

Super cool chart!  Thanks!   And I fully agree with your comment.   Although small caps tend to do better over long periods of time, there can also fairly long periods of time when they don't.   

If I were dolling out ideas to think about, I might suggest putting a small percentage into NAESX and the rest into VTSMX/VTSAX.  That way your portfolio would be slightly more weighted towards small caps, but still balanced by the entire market.